WASHINGTON — The Bush administration said Tuesday that without quick reform China’s fixed exchange rate between its yuan and the dollar might disrupt the Chinese economy and the system of global trading.

U.S. Treasury Secretary John Snow stopped short of designating China a country that “manipulates” its currency, which would trigger direct talks with the Chinese and the potential for World Trade Organization action that might lead to sanctions should the negotiations fail.

Snow said at a news conference here that if China doesn’t put into place a more flexible policy there could be “economic disruption and dislocation within China, and within the larger global trading system.”

His remarks came as the Treasury Department released a semiannual report to Congress assessing exchange-rate policies and determining whether they create unfair trading practices. The administration for two years has used so-called financial diplomacy in an effort to convince China to adopt a new exchange rate system.

“The report concludes that failure on the part of China to move to a more flexible regime will almost certainly mean China will meet the technical requirement of the [manipulation] designation in a future report,” Snow said.

Critics of China’s fixed currency argue that it artificially lowers the price of Chinese goods by as much as 40 percent and subsidizes its exports, putting U.S. companies at a disadvantage and leading to job losses. After Snow’s remarks, those critics said the administration’s response continues to be weak.

China has pegged the yuan at a fixed rate to the dollar since 1994 and its trade surplus with the U.S. reached $162 billion last year. Some experts say that allowing the yuan to be subject to market forces will cause it to rise in value from its current level of 8.28 yuan to the dollar.

The Treasury report “calls on China to move to greater flexibility in its exchange rate regime and to do so now,” Snow said. “We think they have made such strides that they are capable of doing that now.”

The study comes less than a week after the U.S. imposed safeguard quotas on several categories of Chinese goods, a move Beijing said it would challenge at the World Trade Organization, although it didn’t say on what grounds.

This story first appeared in the May 18, 2005 issue of WWD. Subscribe Today.

In Brussels, European Union Trade Commissioner Peter Mandelson said Tuesday that the EU would launch formal consultations with China for T-shirts and flax-yarn imports. These are two of the nine categories of textile imports from China currently under an investigation launched on April 29 for possible safeguard quotas due to market disruption. Mandelson said the EU could cap the rise on imports from China within 15 days of the start of formal consultations if there is no other bilateral solution.

The Chinese embassy in Washington did not return a phone call seeking comment on Snow’s remarks. On Monday, according to a report on the government news agency Web site, Chinese Premier Wen Jiabao said, “As long as conditions are ripe, the Chinese government will take the initiative to advance the reform of the exchange rate system without any pressure from outside the country. If conditions are not available, the Chinese government will never hastily take any action, regardless of how great the pressure from outside is.”

The currency report highlighted several steps the Chinese have taken, including measures to increase the value of foreign-exchange trading, developing foreign exchange market instruments to deal with fluctuating currencies and strengthening its financial sector by tightening the supervision of loans and reducing nonperforming loans.

Snow did not set a time limit for China to make more progress. The Treasury Department will release its second report this fall.

Rep. Benjamin Cardin (D., Md.), ranking Democrat on the House Ways & Means subcommittee on trade, criticized the Treasury report in a conference call with reporters.

“This is very frustrating because the report points out there is a distorting impact by China’s policy of linking its currency to the U.S. dollar, but yet the administration is not taking any action,” Cardin said. “Just suggesting that China change its policy without a deadline or time line for filing a WTO claim … is just not acceptable.”

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